Canada’s Federal Budget should have prioritized competitiveness

The 2015 Federal Budget was tabled in the House of Commons last Tuesday, April 21, 2015. It shows that Canada has achieved the highest GDP growth among G-7 countries since the financial crisis.

Yet, productivity growth remains a major concern for the country. In addition, Canadian competitiveness has deteriorated. In 2000, Canada ranked 7th in the World Economic Forum’s Global Competitive Index, but dropped to 14th in 2014. Canada needs a budget that prioritizes long-term competitiveness and productivity enhancements to provide all Canadians with a good standard of living.

The Federal Budget proposals encourage businesses to stay small

Although small and medium-sized enterprises (SMEs) are responsible for the largest share of job creation, large companies are on average more efficient and productive. Over the past few years, the federal and provincial governments have adopted various corporate tax incentives for small businesses, aimed at helping them grow. While the intention is good, the results have shown the opposite effect on business growth.

In the most recent Annual Report, the Institute revealed that Canada is the second best country to start a business among 189 countries. Despite this advantage, Canada performed poorly in indicators evaluating the environment for business growth, such as trading across borders, dealing with construction permits, and getting electricity. Furthermore, Canada’s global companies trailed international peers in market value, indicating the poorer performance of Canada’s global corporations.

Academics often criticize the business tax system in Canada, mostly the “taxation wall” created for small business with $500,000 of taxable income. There is evidence showing that the corporate tax structure in Canada distorts business behavior and impedes small business growth. Companies tend to break up into smaller and less efficient units in order to take advantage of the small businesses tax deduction. Additionally, this deduction encourages individuals who fall into higher personal income tax brackets to create small corporations in order to reduce their personal income tax liabilities. Unfortunately, the 2015 Budget highlighted a plan to further cut the federal small business tax rate from 11 percent to 9 percent by 2019. Meanwhile, the federal government will decrease the Employment Insurance (EI) premiums for qualified small businesses. By further widening the disparity between large and small business federal corporate tax rates and contribution requirements, the incentives for small businesses to grow will be further stifled.

The Budget proposes a Universal Child Care Benefit (UCCB) totaling $7.8 billion in 2015-16, and ongoing spending of over $4.5 billion each year thereafter. While the UCCB was designed to enhance the Canada Child Tax Benefit (CCTB), it will be offered on a per child basis instead of an income level basis as it was. Thus, this could make the child care benefit program that aims to combat child poverty and income inequality less effective. According to Martin Prosperity Institute, low-income families in Canada (the bottom 25th percentiles in the income distribution) are much more likely to spend the money from the program than high-income families. Additionally, low-income families spend the child-tax benefit very wisely, on more education, including tuition and computer equipment. They also found evidence from the U.S. showing that maternal “risky” behavior like smoking declines when mothers get more benefit income.

On the other hand, a shortage of government-regulated space for child care is reported as the most pressing child-care problem. According to a study by Child Care Canada, public spending for early childhood education and care (ECEC) remains low compared to the soaring demand. Desperate parents stuck on day care waiting lists have to either reduce their working hours (negatively affecting output by reducing work intensity) or be forced to put their children into unlicensed daycare. Either way, the Institute sees an increasing need for building more high quality child care centers rather than funding a universal taxable benefit. These programs will not only create more jobs, but also save time and money for families with children, especially working mothers, thus generating long-term benefits for the country.

Transportation infrastructure spending continues to lag in Canada

Low investments in public transit and roads are hampering Canada’s competitiveness by affecting the country’s business attractiveness and productivity. According to McKinsey Global Institute, the latest estimated investment needed for Canada’s urban roads and bridges to satisfy the demand, amount to about $66 billion over next 10 years. The 2015 Budget proposes investments of $53 billion under the New Building Canada Plan (NBCP), devoted to the entire public infrastructure stock. Yet, this amount will not even meet the estimated need to close only one aspect of Canada’s infrastructure deficit. Among the $37 billion dedicated federal funding, Ontario received merely 29 percent of the Plan’s monies. Nonetheless, Ontario makes up nearly 39 percent of the country’s population and 37 percent of Canadian GDP. Receiving an inadequate share of the Federal Funds will limit the province’s capacity to invest in productivity enhancing infrastructure, especially regarding transportation, which will adversely impact the overall growth of Ontario’s economy.

The Institute reviewed the Budget and advocates for greater allocation of federal resources to productivity enhancements and long-term competitiveness. The 2015 Budget focuses greatly on balancing the federal public accounts. But balancing the budget without fully tackling the most pressing challenges that Canada is facing might be costly for the country from a global competitiveness perspective.